Is BOLI Still Viable for 2024 & Beyond?

Written by: Andesa Services

Bank-owned life insurance (BOLI) has long been a popular and strategic financial instrument for banks, offering a range of benefits from offsetting employee benefit costs to providing tax-advantaged returns. Andesa has previously delved into the outlook for BOLI following the pressures of recent events such as the collapse of Silicon Valley Bank (SVB). However, with continued anxiety and subsequent regulatory pressures, there are still questions about the continued viability of BOLI bank-owned life insurance in the financial landscape of 2024 and beyond.

Let’s dive deeper into the viability of BOLI life insurance and explore how Andesa plays a vital role in this scenario, providing specialized administrative support that enhances the value and management of BOLI policies for banks.

The Advantages of BOLI Bank-Owned Life Insurance

Before delving into the current viability of BOLI, it’s essential to grasp the multifaceted advantages it offers to financial institutions. BOLI life insurance is a strategic financial instrument representing institutionally priced life insurance held by banks, typically on key personnel such as directors or senior leadership. Its appeal stems from various intrinsic benefits, each contributing to its allure within the banking sector.

One of the standout features of BOLI lies in its tax efficiency. The cash value growth within a BOLI policy occurs on a tax-deferred basis. This means that as the policy accumulates value over time, the growth is shielded from immediate taxation, allowing for the potential for significant wealth accumulation within the policy. Furthermore, upon the insured individual’s death, the BOLI policy proceeds are disbursed to the bank as the named beneficiary on a tax-free basis. This tax advantage enhances the overall return on investment and is a powerful tool for managing tax liabilities within the institution’s financial strategy.

BOLI is also a versatile tool for banks to offset or underwrite various employee benefits, particularly for executives. Banks can effectively manage and fund executive compensation packages by leveraging BOLI life insurance, including deferred compensation plans, supplemental life insurance, and other benefit expenses. This capability enhances the bank’s competitive edge in attracting and retaining top talent and fosters stability within the workforce by providing valuable incentives and benefits to key personnel.

Beyond its role in employee benefits management, BOLI bank-owned life insurance offers banks a unique investment strategy that can yield attractive returns. The investment component of BOLI policies often outperforms traditional bank investments, providing an avenue for diversification and enhanced portfolio performance. Banks can optimize their investment portfolios to achieve superior after-tax returns with access to various investment options within the BOLI policy, including fixed-income securities, equities, and alternative investments. This investment flexibility, coupled with the tax advantages inherent in BOLI life insurance, positions it as a compelling asset for banks seeking to maximize their returns while managing risk.

By leveraging these benefits, financial institutions can enhance their financial performance, mitigate tax liabilities, attract and retain top talent, and optimize investment strategies. As banks navigate the complexities of today’s financial landscape, BOLI remains a powerful tool for achieving strategic objectives and driving long-term success.

Check Out Our BOLI White Paper!

Enhancing BOLI’s Value with Andesa’s Comprehensive Services

Andesa significantly amplifies the benefits of BOLI through expert policy and plan administration. Our services facilitate the seamless management of BOLI portfolios, encompassing premium payment processing, policyholder data management, and comprehensive reporting. Andesa’s sophisticated analytics tools allow banks to gain deep insights into their BOLI  life insurance investments, helping them make strategic decisions aligning with their financial goals and regulatory requirements.

Policy Administration

Andesa’s policy administration services ensure the meticulous management of BOLI policies, emphasizing accuracy in record-keeping and compliance with evolving regulatory standards. This thorough approach guarantees that banks can maintain their BOLI investments effectively, maximizing their performance and strategic value.

Plan Administration

In plan administration, Andesa excels by offering robust support in managing the intricate aspects of BOLI life insurance plans, from premium payments to benefit disbursements. This support ensures banks can leverage their BOLI bank-owned life insurance policies to fund executive compensation and other employee benefits, aligning with their strategic human resource objectives.

Regulatory Compliance & Risk Management

Andesa aids banks in navigating the complex regulatory environment surrounding BOLI, providing expertise in compliance and risk management. This is crucial for maintaining the viability and integrity of BOLI as a strategic financial instrument in the banking sector.

The Case Against BOLI Life Insurance

Despite the advantages associated with BOLI bank-owned life insurance, objections to its use often center around concerns regarding liquidity and moral considerations related to the involvement of employee death in the policy. While these concerns are valid, a deeper examination reveals fundamental distinctions between banks and life insurers, particularly concerning liquidity risks and regulatory guidelines. And with Andesa’s strategic administration, you can effectively address these challenges.

One of the primary objections to BOLI revolves around liquidity concerns, particularly in comparison to traditional bank assets. Banks are subject to immediate withdrawal demands from depositors, which can trigger a cascade of liquidity problems, potentially leading to a “run on the bank” scenario. In contrast, life insurers typically face more predictable cash flow patterns and do not encounter the same immediate liquidity pressures. The nature of life insurance policies allows for more extended periods for policyholders to access cash values, often subject to surrender charges or other restrictions, thereby mitigating the risk of sudden liquidity demands.

Another area of concern is the regulatory framework surrounding BOLI life insurance, particularly regarding the concentration of holdings relative to a bank’s capital. Regulatory guidelines typically recommend that banks limit their aggregate BOLI capacity to no more than twenty-five percent of their capital. This guideline ensures banks maintain adequate capital reserves to support their operations and withstand unforeseen financial shocks. Historically, most banks have remained well below this threshold, leaving them with excess capacity to purchase BOLI life insurance without compromising their financial stability. This regulatory oversight helps to mitigate systemic risks associated with excessive BOLI holdings while allowing banks to benefit from the advantages offered by these policies.

While objections to BOLI bank-owned life insurance based on liquidity concerns and moral considerations are prevalent, a closer examination reveals that these concerns may be mitigated by the distinct characteristics of life insurance policies and the regulatory framework governing their use. By understanding the differences between banks and life insurers in terms of liquidity risks and adherence to regulatory guidelines, stakeholders can make informed decisions regarding the viability and ethical implications of utilizing BOLI as a financial instrument. Andesa’s involvement further ensures that banks manage their BOLI holdings within regulatory guidelines, mitigating risks and reinforcing ethical standards in policy implementation.

The Viability & Market Resilience of BOLI

The collapse of Silicon Valley Bank (SVB) and other financial institutions has undoubtedly cast a shadow of scrutiny over the banking industry as a whole. However, amidst these challenges, BOLI bank-owned life insurance stands out as a resilient and regulated financial instrument that continues to offer compelling benefits for financial institutions. Despite the turbulence in the banking sector, BOLI remains comfortably within regulatory guidelines, providing attractive tax-equivalent yields and serving as a valuable tool for offsetting the escalating costs of providing employee benefits.

One of the key strengths of BOLI life insurance is its adherence to regulatory guidance, ensuring that financial institutions can utilize this asset within a structured and compliant framework. Regulatory authorities such as the Federal Deposit Insurance Corporation (FDIC) provide oversight and guidance to banks regarding the use of BOLI, helping to maintain stability and integrity within the industry. Despite the challenges posed by bank failures and increased scrutiny, BOLI continues to operate within established regulatory parameters, assuring stakeholders and regulators alike.

BOLI remains an attractive option for financial institutions seeking to generate competitive returns while managing tax liabilities. The tax-deferred growth and tax-free death benefits associated with BOLI bank-owned life insurance policies contribute to their appeal, particularly in an environment of rising costs and tightening margins. By offering tax-equivalent yields that outperform traditional investment options, BOLI enables banks to optimize their returns and bolster their financial performance, even in the face of market volatility and regulatory pressures.

The widespread adoption of BOLI life insurance among U.S. banks underscores the continued confidence in the product’s efficacy and stability. Most banks nationwide utilize BOLI as part of their financial strategies, indicating its enduring popularity and relevance within the industry. This widespread adoption reflects the recognition among banks of the tangible benefits offered by BOLI, including its ability to enhance profitability, manage risk, and support long-term financial sustainability.

Recent market dynamics, including fluctuations in interest rates, have further underscored the resilience and potential of BOLI as a financial asset. Despite the challenges posed by volatile market conditions, new BOLI yields have reached fifteen-to-twenty-year highs, demonstrating the adaptability and attractiveness of BOLI bank-owned life insurance in navigating changing economic landscapes. This resilience highlights BOLI’s ability to deliver consistent and competitive returns, even in times of uncertainty and market turbulence. Andesa’s expert administrative services and strategic insights can also further contribute to the continued confidence and reliance on BOLI as a valuable asset.

BOLI is Still Viable, Especially with Andesa

Despite regulatory pressures and economic uncertainties, BOLI remains a viable option for financial institutions in 2024 and beyond. Its tax efficiency, ability to offset employee benefits, and investment potential make it an attractive choice for banks, particularly in today’s changing market environment. The future of BOLI in the banking industry looks especially promising when Andesa is enhancing its strategic and operational effectiveness.

Through Andesa’s comprehensive support in policy and plan administration, banks can maximize the potential of their BOLI investments, ensuring their sustained success and strategic advantage in the financial sector.

If you’re ready to take advantage of BOLI life insurance, Contact Andesa today!

Follow the Andesa Blog

"*" indicates required fields


Any Questions?